Wednesday, July 21, 2010

Angel investors look for market validation in a startup before investing. Fundamentally, it means the entrepreneur has found a market with a need. Here are the five steps to validate a market segment and the one key criteria that provides the acid test indicating you have found one.

1. Identify the target market—write out a specific definition of your target market segment and how it fits in the overall market. Set up a list of objectives you want to learn from the research.

2. Build the Question Set—in a web/email survey ask no more than five questions. In an interview, ten questions form the basis of a good interview. Match each question to your objectives.

3. Test the question Set—send the question set to five friends and ask them to fill it out and then give you feedback on the wording. You can also check their responses to see if it addresses your question. Rollup the responses and see if the results answer your objectives.

4. Conduct the interviews/surveys – in an email survey you will receive most of the responses you’re going to get in about 2 to 3 days. After that the responses drop off dramatically. In the survey you may want to ask if you can contact them for further questioning. This may give you additional contacts to interviews.

5. Analyze the data—review the raw data yourself. It’s surprising how often the same set of data can generate completely different results from different reviewers.

While surveys and interviews can help validate the market, the one criteria that counts more than anything else is will the customer buy the product/service. Generating revenue even at a small scale says a great deal about your market’s need for the product. This is important because when angels review deals, one of the first questions that come up is “Do they have revenue?” If the answer is “yes” then you’re in the “to be considered” category.